If you've clicked on this you've hopefully already read parts 1 and 2 where you learned that your company not offering a 401(k) is a big negative for potential employees, and not offering a match is leaving money on the table for your employees. Now let's talk about enhancing the 401(k) offering your company is providing.

So what is a safe harbor 401(k)? The IRS notes that a safe harbor 401(k) is similar to a traditional 401(k) but must provide for employer (not employee, let's be clear about this) contributions that are fully vested when made. Basically you've got to offer a match of at least 4% (there are a few options for how to get here) and you have to pay it out on every paycheck.

Since you're already planning on doing this after reading my article on matching 401(k) contributions you might be thinking to yourself "Why should I do whatever extra legwork is required for a safe harbor 401(k)? I'm already going to match!"

With a traditional 401(k) you have to meet certain requirements around how highly compensated employees (HCE) and all your other employees use the 401(k). If you really want to learn about this you can check out the IRS section that talks about these tests or use your favorite internet search engine to find them. Needless to say if Joe the janitor (non-HCE) isn't contributing anything to his 401(k) and Alexandria the CTO (HCE) is you're going to fail these tests. I'm not going to go more in-depth about these because it basically boils down to that if a lot of highly compensated employees, owners, etc. are contributing but lower paid employees aren't you're going to fail these tests. Your 401(k) can have all sorts of issues like having to refund HCE contributions (aka pissing off all the people at your company building your product) so that the values are more in line or provide payments to non-HCE employees to bring everyone up to the same level.

What's the better solution for this? Just offer a safe harbor 401(k) to begin with. Save yourself the hassle and since you're doing what's right by your employees and matching them already there's no reason not to offer a safe harbor 401(k). There are also some date requirements about when you set up the safe harbor 401(k) so get this set up as quickly as possible. Just keep in mind that if you're converting an existing 401(k) plan to a safe harbor 401(k) you're going to have to back pay the employer contributions for the year if you weren't already matching.

So in what situations should you have a safe harbor 401(k)? Personally I don't think there's a single scenario where you shouldn't have a safe harbor 401(k) unless you cannot afford to pay the match requirements. In that situation I'd still rather have a 401(k) than no 401(k) but this should be your number one priority for improvement since it's so cheap as outlined in part 2.

That's all there is to say on this topic. Avoid the hassle and annoying checks of a normal traditional 401(k) and go safe harbor, it's better for everyone involved.

This is part 3 of a 5 part series talking about making a 401(k) so good employees won't believe that it's real and employers won't believe how cheap it is to implement.

Part 1: Every company should have a 401(k)

Part 2: Your company should be matching 401(k) contributions

Part 3: A safe harbor 401(k) is worth the expense

Part 4: True-up or stress out employees with your 401(k) offering

Part 5: Building the ultimate 401(k) for your company